Chapter 02 - Basic Financial Statements
2-1
Chapter 02
Basic Financial Statements
True / False Questions
1. A business entity is regarded as separate from the personal activities of its owners whether
it is a sole proprietorship, a partnership, or a corporation.
True False
2. Assets need not always have physical characteristics as do buildings, machinery, or
inventory.
True False
3. The going concern principle assumes that the business will continue indefinitely.
True False
4. Notes payable and accounts payable are written promises to pay an amount owed by a
certain date. Notes payable generally have interest, while accounts payable generally do not.
True False
5. A net profit results from having more revenues than liabilities.
True False
6. The sale of additional shares of capital stock will cause treasury stock to increase.
True False
7. Articulation between the financial statements means that they relate closely to each other.
True False
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-2
8. Limited liability means that owners of a business are only liable for the debts of the
business up to the amounts they can afford.
True False
9. In a business organized as a corporation, it is not necessary to list the equity of each
stockholder on the balance sheet.
True False
10. Total assets must always equal total liabilities plus total owners' equity.
True False
11. A cash flows statement reports revenue and expense activities for a specific time period
such as one month or one year.
True False
12. Any business event that might affect the future profitability of a business should be
reported in its balance sheet.
True False
13. Total assets plus total liabilities must equal total owners' equity.
True False
14. The practice of showing assets on the balance sheet at their cost, rather than at their
current market value is explained, in part, by the fact that cost is supported by objective
evidence that can be verified by independent experts.
True False
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-3
15. The realization principle states that the activities of an entity should be kept separate from
those of its owner.
True False
16. The entity principle states that the affairs of the owners are not part of the financial
operations of a business entity and should be separated.
True False
17. The accounting equation may be stated as "assets minus liabilities equals owners' equity."
True False
18. A transaction that causes an increase in an asset may also cause a decrease in another
asset, an increase in a liability, or an increase in owners' equity.
True False
19. The collection of an account receivable will cause total assets to decrease.
True False
20. The payment of a liability causes an increase in owners' equity.
True False
21. When a business borrows money from a bank, the immediate effect is an increase in total
assets and a decrease in liabilities or owners' equity.
True False
22. The purchase of an asset, such as office equipment, for cash will cause owners' equity to
decrease.
True False
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-4
23. The owner of a sole proprietorship is personally liable for the debts of the business,
whereas the stockholders of a corporation are not personally liable for the debts of the
business.
True False
24. If a company purchases equipment with cash, its total assets will increase.
True False
25. If a company purchases equipment by issuing a note payable, its total assets will not
change.
True False
26. It is not unusual for an entity to report a significant increase in cash from operating
activities, but a decrease in the total amount of cash.
True False
27. The cash flows statement provides a link between two balance sheets by showing how net
income (or loss) has changed owners' equity from one balance sheet date to the next.
True False
28. According to the Sarbanes-Oxley Act of 2002, internal controls must be audited by the
same accounting firm that audits the financial statements.
True False
29. The Public Company Accounting Oversight Board was created by the American Institute
of CPAs to oversee the public accounting profession.
True False
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-5
30. The major outgrowth from business failures and allegations of fraudulent financial
reporting during the 1990's was the passage of the Securities and Exchange Act.
True False
Multiple Choice Questions
31. Which of the following best describes liquidity?
A. The ability to increase the value of retained earnings.
B. The ability to pay the debts of the company as they become due.
C. Being able to buy everything the company requires for cash.
D. Purchasing everything the company requires on credit.
32. Profitability may be defined as:
A. The ability to pay the debts of the company as they fall due.
B. The ability to increase retained earnings.
C. Distributing dividends.
D. Having excess cash.
33. The principle of adequate disclosure means that a company should disclose:
A. Only the important monetary information.
B. All confidential information regarding the company.
C. Any financial facts that a reasonably informed person would consider necessary for the
proper interpretation of the financial statements.
D. Only subsequent events.
34. Blue Wholesale Shirt Co. sold shirts to Pink Retail Shoppe. The owner of Pink Retail said
she would pay Blue at a later date, which Blue Wholesale agreed to. Blue Wholesale Shirt Co.
is considered to be a:
A. borrower.
B. liability.
C. creditor.
D. debtor.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-6
35. Owners' equity in a business increases as a result of which of the following?
A. Payments of cash to the owners.
B. Losses from unprofitable operation of the business.
C. Earnings from profitable operation of the business.
D. Borrowing from a commercial bank.
36. Owners' equity in a business decreases as a result of which of the following?
A. Investments of cash by the owners.
B. Profits from operating the business.
C. Losses from unprofitable operation of the business.
D. Repaying a loan to a commercial bank.
37. Which one of the following is not considered one of the three primary financial
statements?
A. Balance sheet.
B. Income statement.
C. Statement of cash flows.
D. Statement of budgeting activities.
38. Which of the following is the primary objective of financial statements?
A. Providing managers with detailed information tailored to the managers' specific
information needs.
B. Providing users outside the business organization with information about the company's
financial position and operating results.
C. Reporting to the Internal Revenue Service the company's taxable income.
D. Indicating to investors in a particular company the current market values of their
investments.
39. Which of the following is descriptive of the proper form of a balance sheet?
A. The heading sets forth the period of time covered.
B. Cash is always the first asset listed, followed by permanent assets (such as land and
buildings), and finally by assets such as receivables and supplies.
C. Liabilities are listed before owners' equity.
D. A subtotal for total assets plus total liabilities is shown.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-7
40. A balance sheet is designed to show:
A. How much a business is worth.
B. The profitability of the business during the current year.
C. The assets, liabilities, and owners' equity of a business as of a particular date.
D. The cost of replacing the assets and of paying off the liabilities at December 31.
41. The way in which financial statements relate is known as:
A. Solvency.
B. Objectivity.
C. Articulation.
D. Entity.
42. If total assets equal $270,000 and total liabilities equal $202,500, the total owners' equity
must equal:
A. $472,500.
B. $67,500.
C. $270,000.
D. Cannot be determined from the information given.
43. Which of the following best defines an asset?
A. Something with physical form that is valued at cost in the accounting records.
B. An economic resource owned by a business and expected to benefit future operations.
C. An economic resource representing cash or the right to receive cash in the near future.
D. Something owned by a business that has a ready market value.
44. To appear in a balance sheet of a business entity, an asset need not:
A. Be an economic resource.
B. Have a ready market value.
C. Be expected to benefit future operations.
D. Be owned by the business.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-8
45. If total assets equal $345,000 and total owners' equity equal $120,000, then total liabilities
must equal:
A. $465,000.
B. $225,000.
C. $120,000.
D. Cannot be determined from the information given.
46. A balance sheet:
A. Provides owners, investors, and other interested parties with all the financial information
they need to evaluate the financial strength, profitability, and future prospects of a given
business entity.
B. Shows the current market value of the owners' equity in the business at the balance sheet
date.
C. Assists creditors in evaluating the debt-paying ability of a business by showing the assets
and liabilities of the business combined with those of its owner (or owners).
D. Shows the assets, liabilities, and owners' equity of a business entity, valued in conformity
with generally accepted accounting principles.
47. Which of the following is correct if a company purchases equipment for $70,000 cash?
A. Total assets will increase by $70,000.
B. Total assets will decrease by $70,000.
C. Total assets will remain the same.
D. The company's total owners' equity will decrease.
48. From an accounting viewpoint, when is a business considered an entity separate from its
owner(s)?
A. Only when organized as a sole proprietorship.
B. Only when organized as a partnership.
C. Only when organized as a corporation.
D. In each of the above situations, the business is an accounting entity separate from the
activities of the owner(s).
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-9
49. If a company purchases equipment for $65,000 by issuing a note payable:
A. Total assets will increase by $65,000.
B. Total assets will decrease by $65,000.
C. Total assets will remain the same.
D. The company's total owners' equity will decrease.
50. The valuation of assets in the balance sheet is based primarily upon:
A. What it would cost to replace the assets.
B. Cost, because cost is usually factual and verifiable.
C. Current fair market value as established by independent appraisers.
D. Cost, because in the event of liquidation, the assets would be sold at an amount equal to
their original cost.
51. Which of the following is not a generally accepted accounting principle relating to the
valuation of assets?
A. The cost principle - in general, assets are valued at cost, rather than at estimated market
values.
B. The objectivity principle - accountants prefer to use objective, rather than subjective,
information as the basis for accounting information.
C. The safety principle - assets are valued at no more than the value for which they are
insured.
D. The going-concern assumption - one reason for valuing assets such as buildings and
equipment at cost rather than at their current market values is the assumption that the business
will use these assets rather than sell them.
52. Each year, the accountant for Southern Real Estate Company adjusts the recorded value of
each asset to its market value. Using these market value figures on the balance sheet violates:
A. The accounting equation.
B. The stable-dollar assumption.
C. The business entity concept.
D. The cost principle.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-10
53. The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away
at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant's
balance sheet. The reporting of this item in this manner violated the:
A. Cost principle.
B. Business entity concept.
C. Objectivity principle.
D. Going-concern assumption.
54. Which of the following is correct when a corporation uses cash to pay for an expense?
A. Total assets will decrease.
B. Retained earnings will decrease.
C. Owners' equity will decrease.
D. All three of the above statements are correct.
55. If cash flows from operating activities is a negative amount:
A. The company must have a net loss for the year.
B. The company must have a net profit for the year.
C. The company must have paid off more debts than it earned during the year.
D. The company may have net income or a net loss for the year.
56. Eton Corporation purchased land in 1990 for $190,000. In 2008, it purchased a nearly
identical parcel of land for $430,000. In its 2008 balance sheet, Eton valued these two parcels
of land at a combined value of $860,000. Reporting the land in this manner violated the:
A. Cost principle.
B. Principle of the business entity.
C. Objectivity principle.
D. Going-concern assumption.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-11
57. Bob Bertolucci, owner of Bob's Bazaar, also owns a personal residence that costs
$575,000. The market value of his residence is $725,000. During preparation of the financial
statements for Bob's Bazaar, the accounting principle most relevant to the presentation of
Bob's home is:
A. The concept of the business entity.
B. The cost principle.
C. The going-concern assumption.
D. The objectivity principle.
58. Which of the following will not cause a change in the owners' equity of a business?
A. Payment of an interest free business debt.
B. Withdrawal of cash by the owner.
C. Sale of land at a profit.
D. Losses from unprofitable operations.
59. Which business organization is recognized as a separate legal entity under the law?
A. Corporation.
B. Sole proprietorship.
C. Partnership.
D. All business organizations are separate legal entities.
60. The amount of owners' equity in a business is not affected by:
A. The percentage of total assets held in cash.
B. Investments made in the business by the owner.
C. The profitability of the business.
D. The amount of dividends paid to stockholders.
61. Decreases in owners' equity are caused by:
A. Purchases of assets and payment of liabilities.
B. Purchases of assets and incurrence of liabilities.
C. Payment of liabilities and unprofitable operations.
D. Distributions of assets to the owner and unprofitable operations.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-12
62. Which of the following transactions would cause a change in owners' equity?
A. Repayment of the principal on a bank loan.
B. Purchase of a delivery truck on credit.
C. Sale of land on credit for a price above cost.
D. Borrowing money from a bank.
63. An expense is best defined as:
A. Any payment of cash for the benefit of the company.
B. Past, present, or future payments of cash required to generate revenues.
C. Past payments of cash required to generate revenues.
D. Future payments of cash required to generate revenues.
64. If a transaction causes an asset account to decrease, which of the following related effects
may occur?
A. An increase of equal amount in an owners' equity account.
B. An increase in a liability account.
C. An increase of equal amount in another asset account.
D. An increase in the combined total of liabilities and owners' equity.
65. The payment of a business debt not including interest:
A. Decreases total assets.
B. Increases total liabilities.
C. Increases the owners' equity in the business.
D. Decreases the owners' equity in the business.
66. The accounting principle that assumes that a company will operate in the foreseeable
future is:
A. Going concern.
B. Objectivity.
C. Liquidity.
D. Disclosure.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-13
67. Deerpark Corporation recently borrowed $70,000 cash from its bank. Which of the
following was unaffected by this transaction?
A. Assets.
B. Liabilities.
C. Owners' equity.
D. Cash.
68. Which of the following transactions would cause an increase in both assets and owners'
equity?
A. Investment of cash in the business by the owner.
B. Sale of land for a price less than its cost.
C. Borrowing money from a bank.
D. Sale of land for cash at a price equal to its cost.
69. A transaction caused an increase in both assets and owners' equity. This transaction could
have been:
A. A sale of service to a customer producing revenue.
B. Sale of land for a price less than its cost.
C. Borrowing money from a bank.
D. Sale of land for cash at a price equal to its cost.
70. Retained earnings is:
A. The positive cash flows of a company.
B. Net worth of a company.
C. The owners' equity that has accumulated as a result of profitable operations.
D. Equal to the total assets of a company.
71. A revenue transaction results in all of the following except:
A. An increase in assets.
B. An increase in owners' equity.
C. A positive cash flow in either the past, present, or future.
D. An increase in liabilities.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-14
72. If a company has a profit:
A. Assets will be equal to liabilities plus owners' equity.
B. Assets will be less than liabilities plus owners' equity.
C. Assets will be greater than liabilities plus owners' equity.
D. Owners' equity will be greater than its assets.
73. Which of the following activities is not a category into which cash flows are classified?
A. Marketing activities.
B. Operating activities.
C. Financing activities.
D. Investing activities.
74. The change in owners' equity from one balance sheet to the next is partially explained by
the:
A. Statement of cash flows.
B. Statement of financial position.
C. Income statement.
D. Tax return.
75. Capital stock represents:
A. The amount invested in the business by stockholders when shares of stock were initially
issued by a corporation.
B. The owners' equity for a business organized as a corporation.
C. The owners' equity accumulated through profitable operations that have not been paid out
as dividends.
D. The price paid by the current owners to acquire shares of stock in the corporation,
regardless of whether they bought the shares directly from the corporation or from another
stockholder.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-15
76. The balance sheet item that represents the portion of owners' equity resulting from
profitable operations of the business is:
A. Accounts receivable.
B. Cash.
C. Capital stock.
D. Retained earnings.
77. Retained earnings appears on:
A. The income statement.
B. The balance sheet.
C. The statement of cash flows.
D. All three of the financial statements.
78. Which of the following statements regarding liquidity and profitability is not true?
A. If a business is unable to pay its debts as they come due, it is operating unprofitably.
B. A business may be liquid, yet operate unprofitably for several years.
C. A business may operate profitably, yet be unable to meet its obligations.
D. In order to survive in the long-run, a business must both remain liquid and operate
profitably.
79. The concept of adequate disclosure means that:
A. The accounting department of a business must inform management of the accounting
principles used in preparing the financial statements.
B. The company must inform users of any significant facts necessary for proper interpretation
of the financial statements, including events occurring after the financial statement date.
C. The independent auditors must disclose in the financial statements any and all errors
detected in the company's accounting records.
D. The financial statements should include a comprehensive list of each transaction that
occurred during the year.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-16
80. According to the Sarbanes-Oxley Act, CEOs and CFOs must certify to the accuracy of
their company's financial statements:
A. Monthly and Quarterly.
B. Quarterly and Annually.
C. Monthly and Annually.
D. CEOs and CFOs are not required to certify to the company's financial statement; only
CPA's do.
81. A strong statement of cash flows indicates that significant cash is being generated by:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. Effective tax planning.
At December 31, 2009, the accounting records of Braun Corporation contain the following
items:
82. If Capital Stock is $260,000, what is the December 31, 2009 cash balance?
A. $86,000.
B. $94,000.
C. $46,000.
D. $686,000.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-17
83. If Capital Stock is $320,000, total assets of Braun Corporation at December 31, 2009,
amount to:
A. $686,000.
B. $926,000.
C. $726,000.
D. $106,000.
84. If Cash at December 31, 2009, is $86,000, Capital Stock is:
A. $260,000.
B. $300,000.
C. $620,000.
D. $168,000.
85. If Cash at December 31, 2009, is $26,000, total owners' equity is:
A. $160,000.
B. $366,000.
C. $606,000.
D. $400,000.
86. If Cash at December 31, 2009, is $66,000, total assets amount to:
A. $606,000.
B. $806,000.
C. $662,000.
D. $646,000.
At December 31, 2010, the accounting records of Hercules Manufacturing, Inc. contain the
following items:
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-18
87. If total assets of Hercules Manufacturing, Inc. are $556,000, Equipment is carried in
Hercules Manufacturing accounting records at:
A. $377,000.
B. $179,000.
C. $150,000.
D. $90,000.
88. If total assets of Hercules Manufacturing, Inc. are $556,000, Retained Earnings at
December 31, 2010, must be:
A. $811,000.
B. $180,000.
C. $221,000.
D. $335,000.
89. If Retained Earnings at December 31, 2010, is $140,000, total assets amount to:
A. $98,000.
B. $377,000.
C. $475,000.
D. $188,000.
90. If Retained Earnings at December 31, 2010, is $100,000, Equipment is carried in Hercules
Manufacturing, Inc. accounting records at:
A. $42,000.
B. $58,000.
C. $43,500.
D. $345,000.
91. Assume the Equipment shown above was acquired by the business five years ago and has
a book value of $156,000, but has a current appraised value of $200,000. Hercules
Manufacturing's Retained Earnings at December 31, 2010, amounts to:
A. $533,000.
B. $345,000.
C. $198,000.
D. $356,000.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-19
At December 31, 2011 the accounting records of Gordon, Inc. contain the following items:
92. If the Notes Payable is $10,000, the December 31, 2011 cash balance is:
A. $60,000.
B. $160,000.
C. $30,000.
D. $20,000.
93. If the Notes Payable balance is $25,000, then the total assets of Gordon, Inc. at December
31, 2011 amount to:
A. $27,500.
B. $152,500.
C. $120,000.
D. $165,000.
94. If the Cash balance at December 31, 2011 is $67,500, the Notes Payable balance is:
A. $118,750.
B. $47,500.
C. $137,500.
D. $140,000.
95. If the Cash balance at December 31, 2011 is $62,500 then total liabilities amount to:
A. $42,500.
B. $140,000.
C. $45,000.
D. $182,500.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-20
96. Which of the following is correct if at the end of Crystal Imports' first year of operations,
assets are $800,000 and owners' equity is $720,000?
A. The owner must have invested $720,000 to start the business.
B. The business must be operating profitably.
C. Liabilities are $80,000.
D. Liabilities are $1,520,000.
97. During the current year, the assets of Wheatley's increased by $362,000, and the liabilities
increased by $260,000. The owners' equity in the business must have:
A. Decreased by $102,000.
B. Decreased by $622,000.
C. Increased by $102,000.
D. Increased by $622,000.
98. The total liabilities of Hogan's Company on the balance sheet are $270,000; this amount is
equal to three-fourths of the total assets. What is the amount of owners' equity?
A. $202,500.
B. $90,000.
C. $360,000.
D. $630,000.
99. Thirty percent of the total assets of Shanahan Corporation have been financed through
borrowing. The total liabilities of the company are $600,000. What is the amount of owners'
equity?
A. $180,000.
B. $2,000,000.
C. $1,400,000.
D. $2,600,000.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-21
100. A transaction caused a $60,000 increase in both assets and total liabilities. This
transaction could have been which of the following?
A. Purchase of office equipment for $60,000 cash.
B. Purchase of office equipment for $120,000, paying $60,000 cash and issuing a note
payable for the balance.
C. Repayment of a $60,000 bank loan.
D. Investment of $60,000 cash in the business by the owner.
101. If $9,600 cash and a $31,000 note payable are given in exchange for some office
machines to be used in a business:
A. Total assets are increased.
B. Total liabilities are decreased.
C. Total assets are decreased.
D. The owners' equity is increased.
102. If during the current year, liabilities of Corbett's Store increased by $220,000 and
owners' equity increased by $160,000, then:
A. Assets at the end of the year total $380,000.
B. Assets at the end of the year total $60,000.
C. Assets increased during the year by $380,000.
D. Assets decreased during the year by $60,000.
103. If during the current year, liabilities of Hayden Travel decreased by $50,000 and owners'
equity increased by $75,000, then:
A. Assets at the end of the year total $125,000.
B. Assets at the end of the year total $25,000.
C. Assets increased during the year by $25,000.
D. Assets decreased during the year by $125,000.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-22
104. At the end of the current year, the owners' equity in Barclay Bakery is $246,000. During
the year, the assets of the business had increased by $120,000 and the liabilities had increased
by $72,000. Owners' equity at the beginning of the year must have been:
A. $198,000.
B. $174,000.
C. $284,000.
D. $438,000.
105. At the end of the current year, the owners' equity in Durante Co. is $360,000. During the
year, the assets of the business had increased by $68,000 and the liabilities had increased by
$118,000. Owners' equity at the beginning of the year must have been:
A. $410,000.
B. $310,000.
C. $546,000.
D. $174,000.
106. During the current year, the assets of Quality Stairs increased by $175,000 and the
liabilities decreased by $15,000. If the owners' equity in the business is $475,000 at the end of
the year, the owners' equity at the beginning of the year must have been:
A. $335,000.
B. $285,000.
C. $665,000.
D. $615,000.
107. During the month of May, the Henderson Company had the following transactions:
* Revenues of $60,000 were earned and received in cash.
* Bank loans of $9,000 were paid off.
* Equipment of $20,000 was purchased.
* Expenses of $36,800 were paid.
* Stockholders purchased additional shares for $22,000 cash.
A statement of cash flows for May would report net cash flows from operating activities of:
A. $60,000.
B. $16,200.
C. $23,200.
D. $20,000.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-23
Astoria Co. had the following transactions during the month of August:
108. What amount of net income will be reported on an income statement for the month of
August?
A. $20,000.
B. $7,500.
C. $0.
D. $33,500.
109. At the beginning of August, 2010, owners' equity in Astoria was $160,000. Given the
transactions of August, what will owners' equity be at the end of the month?
A. $167,500.
B. $150,500.
C. $193,500.
D. $158,000.
110. For the month of August, net cash flows from operating activities for Astoria were:
A. $33,500.
B. $7,500.
C. $20,000.
D. $26,000.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-24
111. The major provisions of the Sarbanes-Oxley Act of 2002 include all of the following
except:
A. The creation of a new agency to oversee the public accounting profession.
B. Restrictions on the types of consulting services that accounting firms can provide to audit
clients.
C. Reducing responsibility for audit committees when overseeing the financial reporting
process.
D. Requiring the chief executive office and the chief financial officer to certify the accuracy
of their company's financial statements.
During the month of August, the Boyce Company had the following transactions:
112. A statement of cash flows for August, would report net cash flows from operating
activities of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
113. A statement of cash flows for August, would report net cash flows from financing
activities of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-25
114. A statement of cash flows for August, would report net cash flows from investing
activities of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
115. A statement of cash flows for August, would report an increase in cash of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
Waldorf Co. had the following transactions during the month of October:
116. What amount of net income will be reported on an income statement for the month of
October?
A. $18,500.
B. $22,500.
C. $78,000.
D. $100,500.
117. At the beginning of October, owners' equity in Waldorf was $480,000. Given the
transactions of October, 2011, what will owners' equity be at the end of the month?
A. $480,000.
B. $484,000.
C. $502,500.
D. $580,500.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-26
118. For the month of October, net cash flows from operating activities for Waldorf were:
A. $18,500.
B. $22,500.
C. $78,000.
D. $100,500.
During the month of February, the Fadness Company had the following transactions:
119. A statement of cash flows for February, would report net cash flows from operating
activities of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
120. A statement of cash flows for February, would report net cash flows from financing
activities of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-27
121. A statement of cash flows for February, would report net cash flows from investing
activities of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
122. A statement of cash flows for February, would report an increase in cash of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
Essay Questions
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-28
123. Accounting terminology
Listed below are nine technical accounting terms introduced in this chapter:
Each of the following statements may (or may not) describe one of these technical terms. In
the space provided below each statement, indicate the accounting term described, or answer
"None" if the statement does not correctly describe any of the terms. Do not use a term more
than once.
(A.) Having the financial ability to pay debts as they become due.
(B.) An assumption that a business will operate in the foreseeable future.
(C.) Economic resources owned by businesses that are expected to benefit future operations.
(D.) The debts or obligations of a business organization.
(E.) Assets = Liabilities + Owners' Equity
(F.) The principle which states that assets are valued in the balance sheet at their historical
cost.
(G.) A residual amount equal to assets minus liabilities.
124. Accounting equation
(A.) During the current year, the assets of Duffy Stationery increased by $650,000 and the
liabilities decreased by $340,000. What was the change in owners' equity during the year?
(B.) The owners' equity of Graham Interiors appears on the balance sheet as $720,000 and is
equal to one-fourth of total assets. Compute the amount of total liabilities.
(C.) At the end of the year, the owners' equity in Scott Mfg. amounted to $845,000. During
2009, the assets of the business increased by $515,000 and the liabilities increased by
$205,000. The owners' equity at the beginning of 2009 was how much?
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-29
125. Effects of transactions on elements of the accounting equation. Some of the transactions
carried out by Tudor Wholesale during the first month of the company's operations are listed
below. You are to determine the effect of each transaction on the total assets, the total
liabilities, and the owners' equity. Prepare your answer in columnar form, identifying each
transaction by letter and using the symbols (+) for increase, (-) for decrease, and (NC) for no
change. An answer is provided for the first transaction to serve as an example.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-30
126. Effects of transactions on elements of the accounting equation. Some of the transactions
carried out by Tsang Company during the first month of the company's operations are listed
below. You are to determine the dollar effect of each transaction on the total assets, the total
liabilities, and the owners' equity of Tsang Company. Use the symbols (+) for increase, (?) (-)
for decrease, and (NC) for no change. An answer is provided for the first transaction to serve
as an example.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-31
127. List the following accounts in the order that they would appear in a balance sheet.
Capital Stock
Equipment
Accounts Receivable
Retained Earnings
Revenue
Accounts Payable
Cash
Rent Expense
128. Computation of assets, liabilities, and owners' equity after a series of transactions. On
April 30, 2009, the balance sheet of China Collectibles showed total assets of $700,000, total
liabilities of $400,000, and owners' equity of $300,000. The following transactions occurred
in May of 2009:
(1) Capital stock was issued in exchange for $165,000 cash.
(2) The business purchased equipment for $360,000, paying $160,000 cash and issuing a note
payable for $200,000.
(3) The business paid $70,000 of its accounts payable.
(4) The business collected $54,000 of its accounts receivable.
Compute the following as of May 31, 2009:
(A.) Total assets $___________
(B.) Total liabilities $___________
(C.) Owners' equity $___________
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-32
129. Computation of assets, liabilities, and owners' equity after a series of transactions. The
December 31, 2009 balance sheet of Charles Realty reported total assets of $900,000, total
liabilities of $350,000, and owners' equity of $550,000. The following transactions occurred
in January of 2010:
(1) The business purchased land for $250,000, paying $100,000 cash and issuing a note
payable for the balance.
(2) The business collected accounts receivable totaling $45,000.
(3) The business sold land costing $50,000 for $60,000 cash.
(4) The business paid $50,000 of the note payable.
Compute the following at January 31, 2010:
(A.) Total assets $__________
(B.) Total liabilities $__________
(C.) Owners' equity $__________
130. Preparation of balance sheet
Prepare the balance sheet as of December 31, 2009, for Gamma Company, from the following
list of items which are arranged in random order. You must compute the amount for accounts
payable to complete the balance sheet.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-33
131. Preparation of balance sheet after a series of transactions
The balance sheet was as follows for Custom Ceramics on February 1, 2010:
During the first week of February, the following transactions occurred:
* The business used cash to pay off $5,000 of its accounts payable. (No payment was made on
the notes payable.)
* Additional capital stock was issued to Joan Custom for $15,000 cash.
*Equipment was purchased on credit for $1,800
* The business collected $4,000 cash from accounts receivable.
Complete the balance sheet for Custom Ceramics as of February 8, 2010.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-34
132. Completion of balance sheet
Use the following information to complete the balance sheet of Adelphi Construction as of
December 31, 2010.
(1) The company was organized on January 1, 2010 and has operated for the full year 2010.
(2) Earnings were $275,000 and dividends of $70,000 were paid to stockholders.
(3) Cash and accounts receivable together amount to one and one-half times as much as notes
payable.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-35
133. Completion of balance sheet
Use the following information to complete the December 31, 2009 balance sheet of Copper
Supplies Company.
(1) Owners' equity as of January 1, 2009, totaled $175,000, which included capital stock of
$150,000.
(2) Additional capital stock was issued during 2009 in exchange for $40,000 cash.
(3) Net income for 2009 amounted to $200,000; no dividends were paid during 2009.
(4) Cash and accounts receivable together amount to 3 times as much as accounts payable.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-36
134. Effects of transactions on balance sheet items
Show the effect of each of the seven listed transactions on the balance sheet items of
Distinctive Draperies. Indicate the new balances after the transaction of May 2 and each
subsequent transaction. The effects of the May 1 transaction are already filled in to provide
you with an example.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-37
135. Effects of transactions on balance sheet items
Show the effect of each of the seven listed transactions on the balance sheet items of
Renaissance Investment Services, Inc. Indicate the new balances after the transaction of
November 2 and each subsequent transaction. The effects of the November 1 transaction are
already filled in to provide you with an example.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-38
136. An inexperienced accounting intern at Tasso Company prepared the following income
statement for the month of July 2009:
Instructions: Prepare a revised income statement in accordance with generally accepted
accounting principles.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-39
137. From the following accounts and amounts prepare a balance sheet for the Swell
Company for December 31, 2010. You must compute the amount for retained earnings to
complete the balance sheet.
138. Financial statements
A set of financial statements includes three related accounting reports, or statements. In the
space provided, list the names of three primary statements, and give a brief description of the
accounting information contained in each.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-40
139. Development of generally accepted accounting principles
(A.) What is meant by the phrase "generally accepted accounting principles"?
(B.) Give the names of three organizations that currently play an active role in the
development of accounting principles in the United States.
140. Valuation of assets under generally accepted accounting principles. Under generally
accepted accounting principles, the assets owned by a business are reported in the balance
sheet at their historical cost. Identify and briefly explain two accounting principles other than
the cost principle that support the valuation of assets at cost in the balance sheet.
141. Forms of Business Organization
State and describe the three most common forms of business organizations in the United
States.
Multiple Choice Questions
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-41
142. The financial statements of a business entity:
A. Include the balance sheet, income statement, and income tax return.
B. Provide information about the profitability and financial position of the company.
C. Are the first step in the accounting process.
D. Are prepared for a fee by the Financial Accounting Standards Board.
143. A balance sheet is designed to show the financial position of an entity:
A. At a single point in time.
B. Over a period of time such as a year or quarter.
C. At December 31 of the current year.
D. At January 1 of the coming year.
144. Accounts payable and notes payable are:
A. Always less than the amount of cash a business owns.
B. Creditors.
C. Written promises to pay a certain amount, plus interest, at a definite future date.
D. Liabilities.
145. The balance sheet of Dotty Designs includes the following items:
This list includes:
A. Four assets and three liabilities.
B. Five assets and three liabilities.
C. Five assets and two liabilities.
D. Six assets and two liabilities.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-42
146. An accounting entity may best be described as:
A. An individual.
B. A particular economic unit.
C. A publicly owned corporation.
D. Any corporation, regardless of size.
Presented below is the balance sheet for Sabino Family Dentistry on January 1 of the current
year.
During the first few days of January, the following transactions occurred:
Jan 1 The business borrowed $99,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $44,550 cash.
3 Equipment was purchased for $62,700 on credit.
5 The business collected $26,400 of its accounts receivable and paid $37,950 of its accounts
payable.
147. On January 6, total assets of the business amount to:
A. $826,650.
B. $994,950
C. $957,000.
D. $950,400.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-43
148. On January 6, owners' equity amounts to:
A. $752,400.
B. $44,550.
C. $796,950.
D. $895,950.
149. On January 6, the accounts payable balance is:
A. $136,950.
B. $36,300.
C. $24,750.
D. $99,000.
150. On January 6, the accounts receivable balance is:
A. $24,750.
B. $38,775.
C. $77,550.
D. $63,525.
151. On January 6, the cash balance is:
A. $127,050.
B. $138,600.
C. $165,000.
D. $202,950
Essay Questions
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-44
152. Presented below is the balance sheet for Manhattan Family Dentistry on January 1 of the
current year.
During the first few days of January, the following transactions occurred:
Jan 2 Equipment was purchased for $38,000 on credit.
2 The business collected $16,000 of its accounts receivable and paid $23,000 of its accounts
payable.
3 The business borrowed $60,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $27,000 cash.
Complete the following balance sheet for Manhattan Family Dentistry on January 4 of the
current year.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-45
153. Complete the January 31, 20__, balance sheet of Countrywide Legal Services using the
following information.
(1) Stockholders' equity at January 1, 20__, included capital stock of $140,000.
(2) The land and building were purchased by the business for a total price of $200,000 on
January 25, 20__, from a company forced out of business. On January 31, an appraiser valued
the property at $260,000.
(3) Additional capital stock was issued in exchange for $50,000 cash.
(4) Retained earnings at January 31, 20___, amounted to $49,400.
Multiple Choice Questions
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-46
154. A set of financial statements:
A. Is intended to assist users in evaluating the financial position, profitability, and future
prospects of an entity.
B. Is intended to assist the IRS in determining the amount of income taxes owed by a business
organization.
C. Includes notes disclosing information necessary for the proper interpretation of the
statements.
D. Is intended to assist investors and creditors in making decisions involving the allocation of
economic resources.
155. Which of the following statements is not consistent with generally accepted accounting
principles relating to asset valuation?
A. Many assets are originally recorded in accounting records at their cost to the business
entity.
B. Subtracting total liabilities from total assets indicates what the owner's equity in the
business is worth under current market conditions.
C. Accountants assume that assets such as office supplies, land, and buildings will be used in
business operations, rather than being sold at current market prices.
D. Accountants prefer to base the valuation of assets upon objective, verifiable evidence
rather than upon appraisals or personal opinion.
156. Water world Boat Shop purchased a truck for $12,000, making a down payment of
$5,000 cash, and signing a $7,000 note payable due in 60 days. As a result of this transaction:
A. Total assets increased by $12,000.
B. Total liabilities increased by $7,000.
C. From the viewpoint of a short-term creditor, this transaction makes the business more
solvent.
D. This transaction had no immediate effect upon the owner's equity in the business.
157. A transaction caused a $15,000 decrease in both total assets and total liabilities. This
transaction could have been:
A. Purchase of a delivery truck for $15,000 cash.
B. An asset with a cost of $15,000 was destroyed by fire.
C. Repayment of a $15,000 bank loan.
D. Collection of a $15,000 account receivable.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-47
158. Which of the following is (are) correct about a company's balance sheet?
A. It displays sources and uses of cash for the period.
B. It is an expansion of the basic accounting equation: Assets = Liabilities + Owners' Equity.
C. It is sometimes referred to as a statement of financial position.
D. It is unnecessary if both an income statement and statement of cash flows are available.
159. Which of the following would you expect to find in a correctly-prepared income
statement?
A. Cash balance at the end of the period.
B. Revenues earned during the period.
C. Contributions by the owner during the period.
D. Expenses incurred during the period to earn revenues.
160. What information would you find in a statement of cash flows that you would not be able
to get from the other two primary financial statements?
A. Cash provided by or used in financing activities.
B. Cash balance at the end of the period.
C. Total liabilities due to creditors at the end of the period.
D. Net income.
161. Which of the following statements relating to the role of professional judgment in the
financial reporting process are valid?
A. Different accountants may evaluate similar situations differently.
B. The determination of which items should be disclosed in notes to financial statements
requires professional judgment.
C. Once a complete list of generally accepted accounting principles is prepared, judgment
need no longer enter into the financial reporting process.
D. The possibility always exists that professional judgment later may prove to have been
incorrect.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-48
Chapter 02 Basic Financial Statements Answer Key
True / False Questions
1. A business entity is regarded as separate from the personal activities of its owners whether
it is a sole proprietorship, a partnership, or a corporation.
TRUE
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Reporting Bloom's: Understand
Difficulty: Easy
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
2. Assets need not always have physical characteristics as do buildings, machinery, or
inventory.
TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand Difficulty: Easy
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles. Topic: A Starting Point: Statement of Financial Position
3. The going concern principle assumes that the business will continue indefinitely.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-49
4. Notes payable and accounts payable are written promises to pay an amount owed by a
certain date. Notes payable generally have interest, while accounts payable generally do not.
TRUE
AACSB: Reflective Thinking
AICPA BB: Resource Management AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
5. A net profit results from having more revenues than liabilities.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Easy
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of the relationship of revenues and expenses.
Topic: Income Statement
6. The sale of additional shares of capital stock will cause treasury stock to increase.
FALSE
AACSB: Reflective Thinking AICPA BB: Resource Management
AICPA FN: Measurement
Bloom's: Understand Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-50
7. Articulation between the financial statements means that they relate closely to each other.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Remember
Difficulty: Medium Learning Objective: 02-07 Explain how the statement of financial position (balance sheet); income statement; and statement of cash flows
relate to each other.
Topic: Relationships among Financial Statements
8. Limited liability means that owners of a business are only liable for the debts of the
business up to the amounts they can afford.
FALSE
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Measurement Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-08 Explain common forms of business ownership—sole proprietorship; partnership; and corporation—and demonstrate how they differ in terms of their presentation in the statement of financial position.
Topic: Forms of Business Organization
9. In a business organized as a corporation, it is not necessary to list the equity of each
stockholder on the balance sheet.
TRUE
AACSB: Reflective Thinking AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Understand Difficulty: Medium
Learning Objective: 02-08 Explain common forms of business ownership—sole proprietorship; partnership; and corporation—and
demonstrate how they differ in terms of their presentation in the statement of financial position.
Topic: Forms of Business Organization
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-51
10. Total assets must always equal total liabilities plus total owners' equity.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
11. A cash flows statement reports revenue and expense activities for a specific time period
such as one month or one year.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting Bloom's: Remember
Difficulty: Easy
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
12. Any business event that might affect the future profitability of a business should be
reported in its balance sheet.
FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom's: Understand Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-52
13. Total assets plus total liabilities must equal total owners' equity.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
14. The practice of showing assets on the balance sheet at their cost, rather than at their
current market value is explained, in part, by the fact that cost is supported by objective
evidence that can be verified by independent experts.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
15. The realization principle states that the activities of an entity should be kept separate from
those of its owner.
FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-53
16. The entity principle states that the affairs of the owners are not part of the financial
operations of a business entity and should be separated.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Remember
Difficulty: Medium Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
17. The accounting equation may be stated as "assets minus liabilities equals owners' equity."
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Easy
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
18. A transaction that causes an increase in an asset may also cause a decrease in another
asset, an increase in a liability, or an increase in owners' equity.
TRUE
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-54
19. The collection of an account receivable will cause total assets to decrease.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
20. The payment of a liability causes an increase in owners' equity.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
21. When a business borrows money from a bank, the immediate effect is an increase in total
assets and a decrease in liabilities or owners' equity.
FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-55
22. The purchase of an asset, such as office equipment, for cash will cause owners' equity to
decrease.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
23. The owner of a sole proprietorship is personally liable for the debts of the business,
whereas the stockholders of a corporation are not personally liable for the debts of the
business.
TRUE
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Measurement Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-08 Explain common forms of business ownership—sole proprietorship; partnership; and corporation—and demonstrate how they differ in terms of their presentation in the statement of financial position.
Topic: Forms of Business Organization
24. If a company purchases equipment with cash, its total assets will increase.
FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand Difficulty: Easy
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-56
25. If a company purchases equipment by issuing a note payable, its total assets will not
change.
FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
26. It is not unusual for an entity to report a significant increase in cash from operating
activities, but a decrease in the total amount of cash.
TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
27. The cash flows statement provides a link between two balance sheets by showing how net
income (or loss) has changed owners' equity from one balance sheet date to the next.
FALSE
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities. Topic: Statement of Cash Flows
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-57
28. According to the Sarbanes-Oxley Act of 2002, internal controls must be audited by the
same accounting firm that audits the financial statements.
TRUE
AACSB: Ethics
AICPA BB: Legal AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management
may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties
29. The Public Company Accounting Oversight Board was created by the American Institute
of CPAs to oversee the public accounting profession.
FALSE
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Reporting Bloom's: Remember
Difficulty: Easy
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties
30. The major outgrowth from business failures and allegations of fraudulent financial
reporting during the 1990's was the passage of the Securities and Exchange Act.
FALSE
AACSB: Ethics AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Remember Difficulty: Easy
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management
may take steps to improve the appearance of the company in its financial statements. Topic: The Use of Financial Statements by External Parties
Multiple Choice Questions
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-58
31. Which of the following best describes liquidity?
A. The ability to increase the value of retained earnings.
B. The ability to pay the debts of the company as they become due.
C. Being able to buy everything the company requires for cash.
D. Purchasing everything the company requires on credit.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
32. Profitability may be defined as:
A. The ability to pay the debts of the company as they fall due.
B. The ability to increase retained earnings.
C. Distributing dividends.
D. Having excess cash.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of the relationship of revenues and expenses.
Topic: Income Statement
33. The principle of adequate disclosure means that a company should disclose:
A. Only the important monetary information.
B. All confidential information regarding the company.
C. Any financial facts that a reasonably informed person would consider necessary for the
proper interpretation of the financial statements.
D. Only subsequent events.
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-59
34. Blue Wholesale Shirt Co. sold shirts to Pink Retail Shoppe. The owner of Pink Retail said
she would pay Blue at a later date, which Blue Wholesale agreed to. Blue Wholesale Shirt Co.
is considered to be a:
A. borrower.
B. liability.
C. creditor.
D. debtor.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
35. Owners' equity in a business increases as a result of which of the following?
A. Payments of cash to the owners.
B. Losses from unprofitable operation of the business.
C. Earnings from profitable operation of the business.
D. Borrowing from a commercial bank.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-60
36. Owners' equity in a business decreases as a result of which of the following?
A. Investments of cash by the owners.
B. Profits from operating the business.
C. Losses from unprofitable operation of the business.
D. Repaying a loan to a commercial bank.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
37. Which one of the following is not considered one of the three primary financial
statements?
A. Balance sheet.
B. Income statement.
C. Statement of cash flows.
D. Statement of budgeting activities.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting Bloom's: Remember
Difficulty: Easy
Learning Objective: 02-07 Explain how the statement of financial position (balance sheet); income statement; and statement of cash flows relate to each other.
Topic: Relationships among Financial Statements
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-61
38. Which of the following is the primary objective of financial statements?
A. Providing managers with detailed information tailored to the managers' specific
information needs.
B. Providing users outside the business organization with information about the company's
financial position and operating results.
C. Reporting to the Internal Revenue Service the company's taxable income.
D. Indicating to investors in a particular company the current market values of their
investments.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium Learning Objective: 02-01 Explain the nature and general purpose of financial statements.
Topic: Introduction to Financial Statements
39. Which of the following is descriptive of the proper form of a balance sheet?
A. The heading sets forth the period of time covered.
B. Cash is always the first asset listed, followed by permanent assets (such as land and
buildings), and finally by assets such as receivables and supplies.
C. Liabilities are listed before owners' equity.
D. A subtotal for total assets plus total liabilities is shown.
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom's: Remember Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-62
40. A balance sheet is designed to show:
A. How much a business is worth.
B. The profitability of the business during the current year.
C. The assets, liabilities, and owners' equity of a business as of a particular date.
D. The cost of replacing the assets and of paying off the liabilities at December 31.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
41. The way in which financial statements relate is known as:
A. Solvency.
B. Objectivity.
C. Articulation.
D. Entity.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Remember
Difficulty: Easy
Learning Objective: 02-07 Explain how the statement of financial position (balance sheet); income statement; and statement of cash flows relate to each other.
Topic: Relationships among Financial Statements
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-63
42. If total assets equal $270,000 and total liabilities equal $202,500, the total owners' equity
must equal:
A. $472,500.
B. $67,500.
C. $270,000.
D. Cannot be determined from the information given.
$270,000 - $202,500 = $67,500
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
43. Which of the following best defines an asset?
A. Something with physical form that is valued at cost in the accounting records.
B. An economic resource owned by a business and expected to benefit future operations.
C. An economic resource representing cash or the right to receive cash in the near future.
D. Something owned by a business that has a ready market value.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-64
44. To appear in a balance sheet of a business entity, an asset need not:
A. Be an economic resource.
B. Have a ready market value.
C. Be expected to benefit future operations.
D. Be owned by the business.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
45. If total assets equal $345,000 and total owners' equity equal $120,000, then total liabilities
must equal:
A. $465,000.
B. $225,000.
C. $120,000.
D. Cannot be determined from the information given.
$345,000 - $120,000 = $225,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-65
46. A balance sheet:
A. Provides owners, investors, and other interested parties with all the financial information
they need to evaluate the financial strength, profitability, and future prospects of a given
business entity.
B. Shows the current market value of the owners' equity in the business at the balance sheet
date.
C. Assists creditors in evaluating the debt-paying ability of a business by showing the assets
and liabilities of the business combined with those of its owner (or owners).
D. Shows the assets, liabilities, and owners' equity of a business entity, valued in conformity
with generally accepted accounting principles.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
47. Which of the following is correct if a company purchases equipment for $70,000 cash?
A. Total assets will increase by $70,000.
B. Total assets will decrease by $70,000.
C. Total assets will remain the same.
D. The company's total owners' equity will decrease.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-66
48. From an accounting viewpoint, when is a business considered an entity separate from its
owner(s)?
A. Only when organized as a sole proprietorship.
B. Only when organized as a partnership.
C. Only when organized as a corporation.
D. In each of the above situations, the business is an accounting entity separate from the
activities of the owner(s).
AACSB: Reflective Thinking
AICPA BB: Legal
AICPA FN: Decision Making
Bloom's: Understand
Difficulty: Easy Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
49. If a company purchases equipment for $65,000 by issuing a note payable:
A. Total assets will increase by $65,000.
B. Total assets will decrease by $65,000.
C. Total assets will remain the same.
D. The company's total owners' equity will decrease.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-67
50. The valuation of assets in the balance sheet is based primarily upon:
A. What it would cost to replace the assets.
B. Cost, because cost is usually factual and verifiable.
C. Current fair market value as established by independent appraisers.
D. Cost, because in the event of liquidation, the assets would be sold at an amount equal to
their original cost.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
51. Which of the following is not a generally accepted accounting principle relating to the
valuation of assets?
A. The cost principle - in general, assets are valued at cost, rather than at estimated market
values.
B. The objectivity principle - accountants prefer to use objective, rather than subjective,
information as the basis for accounting information.
C. The safety principle - assets are valued at no more than the value for which they are
insured.
D. The going-concern assumption - one reason for valuing assets such as buildings and
equipment at cost rather than at their current market values is the assumption that the business
will use these assets rather than sell them.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-68
52. Each year, the accountant for Southern Real Estate Company adjusts the recorded value of
each asset to its market value. Using these market value figures on the balance sheet violates:
A. The accounting equation.
B. The stable-dollar assumption.
C. The business entity concept.
D. The cost principle.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
53. The owner of Westhampton Fish Eatery purchased a new car for his daughter who is away
at college at a cost of $43,000 and reported this amount as Delivery Vehicle in the restaurant's
balance sheet. The reporting of this item in this manner violated the:
A. Cost principle.
B. Business entity concept.
C. Objectivity principle.
D. Going-concern assumption.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-69
54. Which of the following is correct when a corporation uses cash to pay for an expense?
A. Total assets will decrease.
B. Retained earnings will decrease.
C. Owners' equity will decrease.
D. All three of the above statements are correct.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
55. If cash flows from operating activities is a negative amount:
A. The company must have a net loss for the year.
B. The company must have a net profit for the year.
C. The company must have paid off more debts than it earned during the year.
D. The company may have net income or a net loss for the year.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-70
56. Eton Corporation purchased land in 1990 for $190,000. In 2008, it purchased a nearly
identical parcel of land for $430,000. In its 2008 balance sheet, Eton valued these two parcels
of land at a combined value of $860,000. Reporting the land in this manner violated the:
A. Cost principle.
B. Principle of the business entity.
C. Objectivity principle.
D. Going-concern assumption.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
57. Bob Bertolucci, owner of Bob's Bazaar, also owns a personal residence that costs
$575,000. The market value of his residence is $725,000. During preparation of the financial
statements for Bob's Bazaar, the accounting principle most relevant to the presentation of
Bob's home is:
A. The concept of the business entity.
B. The cost principle.
C. The going-concern assumption.
D. The objectivity principle.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-71
58. Which of the following will not cause a change in the owners' equity of a business?
A. Payment of an interest free business debt.
B. Withdrawal of cash by the owner.
C. Sale of land at a profit.
D. Losses from unprofitable operations.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
59. Which business organization is recognized as a separate legal entity under the law?
A. Corporation.
B. Sole proprietorship.
C. Partnership.
D. All business organizations are separate legal entities.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting Bloom's: Remember
Difficulty: Easy
Learning Objective: 02-08 Explain common forms of business ownership—sole proprietorship; partnership; and corporation—and demonstrate how they differ in terms of their presentation in the statement of financial position.
Topic: Forms of Business Organization
60. The amount of owners' equity in a business is not affected by:
A. The percentage of total assets held in cash.
B. Investments made in the business by the owner.
C. The profitability of the business.
D. The amount of dividends paid to stockholders.
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-72
61. Decreases in owners' equity are caused by:
A. Purchases of assets and payment of liabilities.
B. Purchases of assets and incurrence of liabilities.
C. Payment of liabilities and unprofitable operations.
D. Distributions of assets to the owner and unprofitable operations.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
62. Which of the following transactions would cause a change in owners' equity?
A. Repayment of the principal on a bank loan.
B. Purchase of a delivery truck on credit.
C. Sale of land on credit for a price above cost.
D. Borrowing money from a bank.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
63. An expense is best defined as:
A. Any payment of cash for the benefit of the company.
B. Past, present, or future payments of cash required to generate revenues.
C. Past payments of cash required to generate revenues.
D. Future payments of cash required to generate revenues.
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of the relationship of revenues and expenses.
Topic: Income Statement
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-73
64. If a transaction causes an asset account to decrease, which of the following related effects
may occur?
A. An increase of equal amount in an owners' equity account.
B. An increase in a liability account.
C. An increase of equal amount in another asset account.
D. An increase in the combined total of liabilities and owners' equity.
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
65. The payment of a business debt not including interest:
A. Decreases total assets.
B. Increases total liabilities.
C. Increases the owners' equity in the business.
D. Decreases the owners' equity in the business.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-74
66. The accounting principle that assumes that a company will operate in the foreseeable
future is:
A. Going concern.
B. Objectivity.
C. Liquidity.
D. Disclosure.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Easy Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
67. Deerpark Corporation recently borrowed $70,000 cash from its bank. Which of the
following was unaffected by this transaction?
A. Assets.
B. Liabilities.
C. Owners' equity.
D. Cash.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-75
68. Which of the following transactions would cause an increase in both assets and owners'
equity?
A. Investment of cash in the business by the owner.
B. Sale of land for a price less than its cost.
C. Borrowing money from a bank.
D. Sale of land for cash at a price equal to its cost.
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
69. A transaction caused an increase in both assets and owners' equity. This transaction could
have been:
A. A sale of service to a customer producing revenue.
B. Sale of land for a price less than its cost.
C. Borrowing money from a bank.
D. Sale of land for cash at a price equal to its cost.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-76
70. Retained earnings is:
A. The positive cash flows of a company.
B. Net worth of a company.
C. The owners' equity that has accumulated as a result of profitable operations.
D. Equal to the total assets of a company.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
71. A revenue transaction results in all of the following except:
A. An increase in assets.
B. An increase in owners' equity.
C. A positive cash flow in either the past, present, or future.
D. An increase in liabilities.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
72. If a company has a profit:
A. Assets will be equal to liabilities plus owners' equity.
B. Assets will be less than liabilities plus owners' equity.
C. Assets will be greater than liabilities plus owners' equity.
D. Owners' equity will be greater than its assets.
AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-77
73. Which of the following activities is not a category into which cash flows are classified?
A. Marketing activities.
B. Operating activities.
C. Financing activities.
D. Investing activities.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
74. The change in owners' equity from one balance sheet to the next is partially explained by
the:
A. Statement of cash flows.
B. Statement of financial position.
C. Income statement.
D. Tax return.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-07 Explain how the statement of financial position (balance sheet); income statement; and statement of cash flows relate to each other.
Topic: Relationships among Financial Statements
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-78
75. Capital stock represents:
A. The amount invested in the business by stockholders when shares of stock were initially
issued by a corporation.
B. The owners' equity for a business organized as a corporation.
C. The owners' equity accumulated through profitable operations that have not been paid out
as dividends.
D. The price paid by the current owners to acquire shares of stock in the corporation,
regardless of whether they bought the shares directly from the corporation or from another
stockholder.
AACSB: Reflective Thinking
AICPA BB: Legal AICPA FN: Measurement
Bloom's: Remember
Difficulty: Medium Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
76. The balance sheet item that represents the portion of owners' equity resulting from
profitable operations of the business is:
A. Accounts receivable.
B. Cash.
C. Capital stock.
D. Retained earnings.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-79
77. Retained earnings appears on:
A. The income statement.
B. The balance sheet.
C. The statement of cash flows.
D. All three of the financial statements.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Reporting
Bloom's: Understand
Difficulty: Easy
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
78. Which of the following statements regarding liquidity and profitability is not true?
A. If a business is unable to pay its debts as they come due, it is operating unprofitably.
B. A business may be liquid, yet operate unprofitably for several years.
C. A business may operate profitably, yet be unable to meet its obligations.
D. In order to survive in the long-run, a business must both remain liquid and operate
profitably.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-80
79. The concept of adequate disclosure means that:
A. The accounting department of a business must inform management of the accounting
principles used in preparing the financial statements.
B. The company must inform users of any significant facts necessary for proper interpretation
of the financial statements, including events occurring after the financial statement date.
C. The independent auditors must disclose in the financial statements any and all errors
detected in the company's accounting records.
D. The financial statements should include a comprehensive list of each transaction that
occurred during the year.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management
may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties
80. According to the Sarbanes-Oxley Act, CEOs and CFOs must certify to the accuracy of
their company's financial statements:
A. Monthly and Quarterly.
B. Quarterly and Annually.
C. Monthly and Annually.
D. CEOs and CFOs are not required to certify to the company's financial statement; only
CPA's do.
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Reporting Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management may take steps to improve the appearance of the company in its financial statements.
Topic: The Use of Financial Statements by External Parties
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-81
81. A strong statement of cash flows indicates that significant cash is being generated by:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. Effective tax planning.
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
At December 31, 2009, the accounting records of Braun Corporation contain the following
items:
82. If Capital Stock is $260,000, what is the December 31, 2009 cash balance?
A. $86,000.
B. $94,000.
C. $46,000.
D. $686,000.
A/P ($16,000) + N/P ($190,000) + Capital Stock ($260,000) + R.E. ($160,000) = $626,000
Cash (?) + A/R ($40,000) +Land ($240,000) + Building ($180,000) + Equipment ($120,000)
= $626,000 Cash = $46,000
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-82
83. If Capital Stock is $320,000, total assets of Braun Corporation at December 31, 2009,
amount to:
A. $686,000.
B. $926,000.
C. $726,000.
D. $106,000.
A/P ($16,000) + N/P ($190,000) + Capital Stock ($320,000) + R.E. ($160,000) $686,000
Total Assets = $686,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
84. If Cash at December 31, 2009, is $86,000, Capital Stock is:
A. $260,000.
B. $300,000.
C. $620,000.
D. $168,000.
Cash ($86,000) + A/R ($40,000) +Land ($240,000) + Building ($180,000) + Equipment
($120,000) = $666,000 A/P ($16,000) + N/P ($190,000) + Capital Stock (?) + R.E.
($160,000) = $666,000 Capital Stock = $300,000
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-83
85. If Cash at December 31, 2009, is $26,000, total owners' equity is:
A. $160,000.
B. $366,000.
C. $606,000.
D. $400,000.
Cash ($26,000) + A/R ($40,000) +Land ($240,000) + Building ($180,000) + Equipment
($120,000) = $606,000
A/P ($16,000) + N/P ($190,000) + Capital Stock (?) + R.E. ($160,000) = $606,000
Capital Stock= ($240,000) + R. E. ($160,000) = $400,000
Total Owners' Equity = $400,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
86. If Cash at December 31, 2009, is $66,000, total assets amount to:
A. $606,000.
B. $806,000.
C. $662,000.
D. $646,000.
Cash ($66,000) + A/R ($40,000) +Land ($240,000) + Building ($180,000) + Equipment
($120,000) = $646,000 Total Assets = $646,000
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-84
At December 31, 2010, the accounting records of Hercules Manufacturing, Inc. contain the
following items:
87. If total assets of Hercules Manufacturing, Inc. are $556,000, Equipment is carried in
Hercules Manufacturing accounting records at:
A. $377,000.
B. $179,000.
C. $150,000.
D. $90,000.
Cash ($7,000) + A/R ($30,000) +Land ($90,000) + Building ($250,000) + Equipment (?) =
$556,000 Equipment = $179,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-85
88. If total assets of Hercules Manufacturing, Inc. are $556,000, Retained Earnings at
December 31, 2010, must be:
A. $811,000.
B. $180,000.
C. $221,000.
D. $335,000.
A/P ($12,000) + N/P ($135,000) + Capital Stock ($188,000) + R.E.(?) = $556,000
Retained Earnings = $221,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
89. If Retained Earnings at December 31, 2010, is $140,000, total assets amount to:
A. $98,000.
B. $377,000.
C. $475,000.
D. $188,000.
A/P ($12,000) + N/P ($135,000) + Capital Stock ($188,000) + R.E. ($140,000) = $475,000
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-86
90. If Retained Earnings at December 31, 2010, is $100,000, Equipment is carried in Hercules
Manufacturing, Inc. accounting records at:
A. $42,000.
B. $58,000.
C. $43,500.
D. $345,000.
A/P ($12,000) + N/P ($135,000) + Capital Stock ($188,000) + R.E. ($100,000) = $435,000
Cash ($7,000) + A/R ($30,000) + Land ($90,000) + Building ($250,000) + Equipment (?) =
$435,000 Equipment = $58,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
91. Assume the Equipment shown above was acquired by the business five years ago and has
a book value of $156,000, but has a current appraised value of $200,000. Hercules
Manufacturing's Retained Earnings at December 31, 2010, amounts to:
A. $533,000.
B. $345,000.
C. $198,000.
D. $356,000.
Cash ($7,000) + A/R ($30,000) + Land ($90,000) + Building ($250,000) + Equipment
($156,000) = $533,000 A/P ($12,000) + N/P ($135,000) + Capital Stock ($188,000) + R.E.(?)
= $533,000 Retained Earnings = $198,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-87
At December 31, 2011 the accounting records of Gordon, Inc. contain the following items:
92. If the Notes Payable is $10,000, the December 31, 2011 cash balance is:
A. $60,000.
B. $160,000.
C. $30,000.
D. $20,000.
Cash (?) + A/R ($18,750) +Land ($30,000) + Building ($31,250) + Equipment ($40,000) =
$150,000 Cash = $30,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-88
93. If the Notes Payable balance is $25,000, then the total assets of Gordon, Inc. at December
31, 2011 amount to:
A. $27,500.
B. $152,500.
C. $120,000.
D. $165,000.
A/P ($2,500) + N/P ($25,000) + Capital Stock ($12,500) + R.E. ($125,000) = $165,000 Total
Assets = $165,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
94. If the Cash balance at December 31, 2011 is $67,500, the Notes Payable balance is:
A. $118,750.
B. $47,500.
C. $137,500.
D. $140,000.
Cash ($67,500) + A/R ($18,750) + Land ($30,000) + Building ($31,250) + Equipment
($40,000) = $187,500 A/P ($2,500) + N/P (?) + Capital Stock ($12,500) + R.E. ($125,000) =
$187,500 Notes Payable = $47,500
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-89
95. If the Cash balance at December 31, 2011 is $62,500 then total liabilities amount to:
A. $42,500.
B. $140,000.
C. $45,000.
D. $182,500.
Cash ($62,500) + A/R ($18,750) + Land ($30,000) + Building ($31,250) + Equipment
($40,000) = $182,500
A/P ($2,500) + N/P (?) + Capital Stock ($12,500) + R.E. ($125,000) = $182,500
$2,500 (Accounts Payable) + $42,500 (Notes Payable) = $45,000
Total Liabilities = $45,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
96. Which of the following is correct if at the end of Crystal Imports' first year of operations,
assets are $800,000 and owners' equity is $720,000?
A. The owner must have invested $720,000 to start the business.
B. The business must be operating profitably.
C. Liabilities are $80,000.
D. Liabilities are $1,520,000.
$800,000 - $720,000 = $80,000 (Liabilities)
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-90
97. During the current year, the assets of Wheatley's increased by $362,000, and the liabilities
increased by $260,000. The owners' equity in the business must have:
A. Decreased by $102,000.
B. Decreased by $622,000.
C. Increased by $102,000.
D. Increased by $622,000.
$362,000 - $260,000 = $102,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
98. The total liabilities of Hogan's Company on the balance sheet are $270,000; this amount is
equal to three-fourths of the total assets. What is the amount of owners' equity?
A. $202,500.
B. $90,000.
C. $360,000.
D. $630,000.
¾ A = $270,000 A=$360,000; O.E. = ($360,000 - $270,000), or $90,000 (Owners' Equity)
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-91
99. Thirty percent of the total assets of Shanahan Corporation have been financed through
borrowing. The total liabilities of the company are $600,000. What is the amount of owners'
equity?
A. $180,000.
B. $2,000,000.
C. $1,400,000.
D. $2,600,000.
30%A = 600,000 A = 2,000,000; O.E. = (2,000,000 - 600,000) or 1,400,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
100. A transaction caused a $60,000 increase in both assets and total liabilities. This
transaction could have been which of the following?
A. Purchase of office equipment for $60,000 cash.
B. Purchase of office equipment for $120,000, paying $60,000 cash and issuing a note
payable for the balance.
C. Repayment of a $60,000 bank loan.
D. Investment of $60,000 cash in the business by the owner.
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-92
101. If $9,600 cash and a $31,000 note payable are given in exchange for some office
machines to be used in a business:
A. Total assets are increased.
B. Total liabilities are decreased.
C. Total assets are decreased.
D. The owners' equity is increased.
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
102. If during the current year, liabilities of Corbett's Store increased by $220,000 and
owners' equity increased by $160,000, then:
A. Assets at the end of the year total $380,000.
B. Assets at the end of the year total $60,000.
C. Assets increased during the year by $380,000.
D. Assets decreased during the year by $60,000.
$220,000 + $160,000 = $380,000
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Apply
Difficulty: Medium Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-93
103. If during the current year, liabilities of Hayden Travel decreased by $50,000 and owners'
equity increased by $75,000, then:
A. Assets at the end of the year total $125,000.
B. Assets at the end of the year total $25,000.
C. Assets increased during the year by $25,000.
D. Assets decreased during the year by $125,000.
$75,000 - $50,000 = $25,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Apply
Difficulty: Medium Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
104. At the end of the current year, the owners' equity in Barclay Bakery is $246,000. During
the year, the assets of the business had increased by $120,000 and the liabilities had increased
by $72,000. Owners' equity at the beginning of the year must have been:
A. $198,000.
B. $174,000.
C. $284,000.
D. $438,000.
$120,000 - $72,000 = $48,000 $246,000 - $48,000 = $198,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Apply
Difficulty: Hard Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-94
105. At the end of the current year, the owners' equity in Durante Co. is $360,000. During the
year, the assets of the business had increased by $68,000 and the liabilities had increased by
$118,000. Owners' equity at the beginning of the year must have been:
A. $410,000.
B. $310,000.
C. $546,000.
D. $174,000.
$68,000 - $118,000 = ($50,000) $360,000 - $(50,000) = $410,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Apply
Difficulty: Hard Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
106. During the current year, the assets of Quality Stairs increased by $175,000 and the
liabilities decreased by $15,000. If the owners' equity in the business is $475,000 at the end of
the year, the owners' equity at the beginning of the year must have been:
A. $335,000.
B. $285,000.
C. $665,000.
D. $615,000.
$175,000 + $15,000 = $190,000 $475,000 - $190,000 = $285,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Apply
Difficulty: Hard Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-95
107. During the month of May, the Henderson Company had the following transactions:
* Revenues of $60,000 were earned and received in cash.
* Bank loans of $9,000 were paid off.
* Equipment of $20,000 was purchased.
* Expenses of $36,800 were paid.
* Stockholders purchased additional shares for $22,000 cash.
A statement of cash flows for May would report net cash flows from operating activities of:
A. $60,000.
B. $16,200.
C. $23,200.
D. $20,000.
$60,000 -$36,800 = $23,200
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities. Topic: Statement of Cash Flows
Astoria Co. had the following transactions during the month of August:
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-96
108. What amount of net income will be reported on an income statement for the month of
August?
A. $20,000.
B. $7,500.
C. $0.
D. $33,500.
$33,500 - $26,000 = $7,500
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Analyze Difficulty: Medium
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses. Topic: Income Statement
109. At the beginning of August, 2010, owners' equity in Astoria was $160,000. Given the
transactions of August, what will owners' equity be at the end of the month?
A. $167,500.
B. $150,500.
C. $193,500.
D. $158,000.
$160,000 + $7,500 (Net income) - $9,500 (Dividends) = $158,000
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Analyze
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-97
110. For the month of August, net cash flows from operating activities for Astoria were:
A. $33,500.
B. $7,500.
C. $20,000.
D. $26,000.
$33,500 - $26,000 = $7,500
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Analyze Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities. Topic: Statement of Cash Flows
111. The major provisions of the Sarbanes-Oxley Act of 2002 include all of the following
except:
A. The creation of a new agency to oversee the public accounting profession.
B. Restrictions on the types of consulting services that accounting firms can provide to audit
clients.
C. Reducing responsibility for audit committees when overseeing the financial reporting
process.
D. Requiring the chief executive office and the chief financial officer to certify the accuracy
of their company's financial statements.
AACSB: Ethics AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Remember Difficulty: Medium
Learning Objective: 02-09 Discuss the importance of financial statements to a company and its investors and creditors and why management
may take steps to improve the appearance of the company in its financial statements. Topic: The Use of Financial Statements by External Parties
During the month of August, the Boyce Company had the following transactions:
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-98
112. A statement of cash flows for August, would report net cash flows from operating
activities of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
Cash revenues $120,000 - cash expenses $73,600 = $46,400
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities. Topic: Statement of Cash Flows
113. A statement of cash flows for August, would report net cash flows from financing
activities of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
Sale of stock $44,000 - bank loan paid $18,000 = $26,000
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-99
114. A statement of cash flows for August, would report net cash flows from investing
activities of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
Equipment purchased $40,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities. Topic: Statement of Cash Flows
115. A statement of cash flows for August, would report an increase in cash of:
A. $26,000.
B. $32,400.
C. $40,000.
D. $46,400.
$46,400+ $26,000 - $40,000 = $32,400
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
Waldorf Co. had the following transactions during the month of October:
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-100
116. What amount of net income will be reported on an income statement for the month of
October?
A. $18,500.
B. $22,500.
C. $78,000.
D. $100,500.
$100,500 - $78,000 = $22,500
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Analyze Difficulty: Medium
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses. Topic: Income Statement
117. At the beginning of October, owners' equity in Waldorf was $480,000. Given the
transactions of October, 2011, what will owners' equity be at the end of the month?
A. $480,000.
B. $484,000.
C. $502,500.
D. $580,500.
$480,000 + $22,500 (Net income) - $18,500 (Dividends) = $484,000
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Analyze
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-101
118. For the month of October, net cash flows from operating activities for Waldorf were:
A. $18,500.
B. $22,500.
C. $78,000.
D. $100,500.
$100,500 - $78,000 = $22,500
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Analyze Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities. Topic: Statement of Cash Flows
During the month of February, the Fadness Company had the following transactions:
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-102
119. A statement of cash flows for February, would report net cash flows from operating
activities of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
Cash revenues $225,000 - cash expenses $171,400 = $53,600
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities. Topic: Statement of Cash Flows
120. A statement of cash flows for February, would report net cash flows from financing
activities of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
Sale of stock $50,000 + bank loan issued $15,000 - bank loan paid 18,000 = $47,000
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-103
121. A statement of cash flows for February, would report net cash flows from investing
activities of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
Equipment purchased $40,000 - equipment sold $36,000 = $4,000 used
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities. Topic: Statement of Cash Flows
122. A statement of cash flows for February, would report an increase in cash of:
A. $4,000.
B. $47,000.
C. $53,600.
D. $96,600.
$53,600+ $47,000 - $4,000 = $96,600
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the company's operating; investing; and financing activities.
Topic: Statement of Cash Flows
Essay Questions
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-104
123. Accounting terminology
Listed below are nine technical accounting terms introduced in this chapter:
Each of the following statements may (or may not) describe one of these technical terms. In
the space provided below each statement, indicate the accounting term described, or answer
"None" if the statement does not correctly describe any of the terms. Do not use a term more
than once.
(A.) Having the financial ability to pay debts as they become due.
(B.) An assumption that a business will operate in the foreseeable future.
(C.) Economic resources owned by businesses that are expected to benefit future operations.
(D.) The debts or obligations of a business organization.
(E.) Assets = Liabilities + Owners' Equity
(F.) The principle which states that assets are valued in the balance sheet at their historical
cost.
(G.) A residual amount equal to assets minus liabilities.
(A.) Liquidity; (B.) Going concern assumption; (C.) Assets; (D.) Liabilities; (E.) Accounting
equation; (F.) Cost principle; (G.) Owners' equity
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Remember
Difficulty: Easy
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-105
124. Accounting equation
(A.) During the current year, the assets of Duffy Stationery increased by $650,000 and the
liabilities decreased by $340,000. What was the change in owners' equity during the year?
(B.) The owners' equity of Graham Interiors appears on the balance sheet as $720,000 and is
equal to one-fourth of total assets. Compute the amount of total liabilities.
(C.) At the end of the year, the owners' equity in Scott Mfg. amounted to $845,000. During
2009, the assets of the business increased by $515,000 and the liabilities increased by
$205,000. The owners' equity at the beginning of 2009 was how much?
(A.) $990,000 increase
(B.) $2,160,000
(C.) $535,000
Feedback: (A.) Change in owners' equity = $650,000 + $340,000 = $990,000 increase
(B.) Total assets = 4($720,000) = $2,880,000
Total liabilities = $2,880,000 assets - $720,000 owners' equity = $2,160,000
(C.) Change in owners' equity = $515,000 - $205,000 = $310,000 increase
Beginning owners' equity = $845,000 ending balance - $310,000 increase = $535,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Analyze
Difficulty: Medium Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-106
125. Effects of transactions on elements of the accounting equation. Some of the transactions
carried out by Tudor Wholesale during the first month of the company's operations are listed
below. You are to determine the effect of each transaction on the total assets, the total
liabilities, and the owners' equity. Prepare your answer in columnar form, identifying each
transaction by letter and using the symbols (+) for increase, (-) for decrease, and (NC) for no
change. An answer is provided for the first transaction to serve as an example.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-107
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-108
126. Effects of transactions on elements of the accounting equation. Some of the transactions
carried out by Tsang Company during the first month of the company's operations are listed
below. You are to determine the dollar effect of each transaction on the total assets, the total
liabilities, and the owners' equity of Tsang Company. Use the symbols (+) for increase, (?) (-)
for decrease, and (NC) for no change. An answer is provided for the first transaction to serve
as an example.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-109
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand Difficulty: Medium
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-110
127. List the following accounts in the order that they would appear in a balance sheet.
Capital Stock
Equipment
Accounts Receivable
Retained Earnings
Revenue
Accounts Payable
Cash
Rent Expense
Cash, Accounts Receivable, Equipment, Accounts Payable, Capital Stock, Retained Earnings
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-111
128. Computation of assets, liabilities, and owners' equity after a series of transactions. On
April 30, 2009, the balance sheet of China Collectibles showed total assets of $700,000, total
liabilities of $400,000, and owners' equity of $300,000. The following transactions occurred
in May of 2009:
(1) Capital stock was issued in exchange for $165,000 cash.
(2) The business purchased equipment for $360,000, paying $160,000 cash and issuing a note
payable for $200,000.
(3) The business paid $70,000 of its accounts payable.
(4) The business collected $54,000 of its accounts receivable.
Compute the following as of May 31, 2009:
(A.) Total assets $___________
(B.) Total liabilities $___________
(C.) Owners' equity $___________
(A.) Total assets = $995,000
(B.) Total liabilities = $530,000
(C.) Owners' equity = $465,000
Feedback: (A.) Total assets: $700,000 + $165,000 + $360,000 - $160,000 - $70,000 +
$54,000 - $54,000 = $995,000
(B.) Total liabilities: $400,000 + $200,000 - $70,000 = $530,000
(C.) Owners' equity: $300,000 + $165,000 = $465,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-112
129. Computation of assets, liabilities, and owners' equity after a series of transactions. The
December 31, 2009 balance sheet of Charles Realty reported total assets of $900,000, total
liabilities of $350,000, and owners' equity of $550,000. The following transactions occurred
in January of 2010:
(1) The business purchased land for $250,000, paying $100,000 cash and issuing a note
payable for the balance.
(2) The business collected accounts receivable totaling $45,000.
(3) The business sold land costing $50,000 for $60,000 cash.
(4) The business paid $50,000 of the note payable.
Compute the following at January 31, 2010:
(A.) Total assets $__________
(B.) Total liabilities $__________
(C.) Owners' equity $__________
(A.) Total assets = $1,010,000
(B.) Total liabilities = $450,000
(C.) Owners' equity = $560,000
Feedback:
(A.) Total assets: $900,000 + $250,000 - $100,000 + $45,000 - $45,000 - $50,000 + $60,000 -
$50,000 = $1,010,000
(B.) Total liabilities: $350,000 + $150,000 - $50,000 = $450,000
(C.) Owners' equity: $550,000 + $10,000 = $560,000
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-113
130. Preparation of balance sheet
Prepare the balance sheet as of December 31, 2009, for Gamma Company, from the following
list of items which are arranged in random order. You must compute the amount for accounts
payable to complete the balance sheet.
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-114
131. Preparation of balance sheet after a series of transactions
The balance sheet was as follows for Custom Ceramics on February 1, 2010:
During the first week of February, the following transactions occurred:
* The business used cash to pay off $5,000 of its accounts payable. (No payment was made on
the notes payable.)
* Additional capital stock was issued to Joan Custom for $15,000 cash.
*Equipment was purchased on credit for $1,800
* The business collected $4,000 cash from accounts receivable.
Complete the balance sheet for Custom Ceramics as of February 8, 2010.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-115
Feedback: (a.) $7,000 + $4,000 + $15,000 - $5,000 = $21,000
(b.) $5,200 - $4,000 collected = $1,200
(c.) $30,000 + $1,800 = $31,800
(d.) $6,000 + $1,800 (equipment purchase) - $5,000 paid = $2,800
(e.) $126,200 + $15,000 (additional investment) = $141,200
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-116
132. Completion of balance sheet
Use the following information to complete the balance sheet of Adelphi Construction as of
December 31, 2010.
(1) The company was organized on January 1, 2010 and has operated for the full year 2010.
(2) Earnings were $275,000 and dividends of $70,000 were paid to stockholders.
(3) Cash and accounts receivable together amount to one and one-half times as much as notes
payable.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-117
Feedback:
(a.) Total assets must be $620,000 to agree with the total of liabilities plus owners' equity.
(b.) Cash must be $5,000 to achieve a total asset figure of $620,000.
(c.) Cash ($5,000) plus accounts receivable ($85,000) equals $90,000. This total is stated to be
1.5 times the amount of notes payable. Notes payable is computed as $90,000 divided by 1.5,
or $60,000.
(d.) Accounts payable must be $115,000 to achieve total liabilities figure of $215,000.
(e.) Retained earnings at the end of the first accounting period must be earnings ($275,000)
less dividends $(70,000), or $205,000.
(f.) Capital stock must be $200,000 to achieve total liabilities and owners' equity figure of
$620,000.
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Measurement
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-118
133. Completion of balance sheet
Use the following information to complete the December 31, 2009 balance sheet of Copper
Supplies Company.
(1) Owners' equity as of January 1, 2009, totaled $175,000, which included capital stock of
$150,000.
(2) Additional capital stock was issued during 2009 in exchange for $40,000 cash.
(3) Net income for 2009 amounted to $200,000; no dividends were paid during 2009.
(4) Cash and accounts receivable together amount to 3 times as much as accounts payable.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-119
Feedback: (a.) Total of liabilities & owners' equity must be $835,000 to agree with the
amount of total assets.
(b.) Cash and accounts receivable together amount to 3 times accounts payable, or $120,000.
Since cash is $30,000, accounts receivable are $120,000 - $30,000, or $90,000.
(c.) Equipment must be $200,000 to achieve total assets of $835,000.
(d.) Beginning capital stock is $150,000 + stock issued of $40,000 = $190,000.
(e.) Beginning retained earnings (175,000 - 150,000) + net income of 200,000 = 225,000.
(f.) Total liabilities must be $420,000 to achieve the total of liabilities plus owners' equity of
$835,000.
(g.) Since total liabilities are $420,000 and accounts payable are $40,000, notes payable must
be $380,000.
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-120
134. Effects of transactions on balance sheet items
Show the effect of each of the seven listed transactions on the balance sheet items of
Distinctive Draperies. Indicate the new balances after the transaction of May 2 and each
subsequent transaction. The effects of the May 1 transaction are already filled in to provide
you with an example.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-121
AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom's: Apply Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation. Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-122
135. Effects of transactions on balance sheet items
Show the effect of each of the seven listed transactions on the balance sheet items of
Renaissance Investment Services, Inc. Indicate the new balances after the transaction of
November 2 and each subsequent transaction. The effects of the November 1 transaction are
already filled in to provide you with an example.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-123
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-124
136. An inexperienced accounting intern at Tasso Company prepared the following income
statement for the month of July 2009:
Instructions: Prepare a revised income statement in accordance with generally accepted
accounting principles.
AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses.
Topic: Income Statement
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-125
137. From the following accounts and amounts prepare a balance sheet for the Swell
Company for December 31, 2010. You must compute the amount for retained earnings to
complete the balance sheet.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting Bloom's: Apply
Difficulty: Medium
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-126
138. Financial statements
A set of financial statements includes three related accounting reports, or statements. In the
space provided, list the names of three primary statements, and give a brief description of the
accounting information contained in each.
* Balance sheet. A report showing at a specific date the financial position of the company by
reporting the assets (resources) that it owns, the liabilities (debts) that it owes, and the amount
of the owners' equity in the business.
* Income statement. A report indicating the profitability (or net income) of the business over a
specific time period.
* Statement of cash flows. A report summarizing the cash receipts and cash payments of the
business over the same time period covered by the income statement. The cash flows from
three activities are presented on the statement. In order of presentation, they include: (1)
operating activities; (2) investing activities; and (3) financing activities.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium Learning Objective: 02-01 Explain the nature and general purpose of financial statements.
Topic: Introduction to Financial Statements
139. Development of generally accepted accounting principles
(A.) What is meant by the phrase "generally accepted accounting principles"?
(B.) Give the names of three organizations that currently play an active role in the
development of accounting principles in the United States.
(A.) Generally accepted accounting principles are the concepts, standards, or rules used in the
preparation of financial statements.
(B.) Student may list any three of the following:
* Financial Accounting Standards Board (FASB)
* American Institute of Certified Public Accountants (AICPA)
* Securities and Exchange Commission (SEC)
* American Accounting Association (AAA)
AACSB: Ethics
AICPA BB: Critical Thinking
AICPA FN: Reporting Bloom's: Remember
Difficulty: Medium
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-127
140. Valuation of assets under generally accepted accounting principles. Under generally
accepted accounting principles, the assets owned by a business are reported in the balance
sheet at their historical cost. Identify and briefly explain two accounting principles other than
the cost principle that support the valuation of assets at cost in the balance sheet.
Student may choose any two of the following:
* Going-concern assumption. An assumption by accountants that a business will operate
indefinitely unless specific evidence to the contrary exists, such as impending bankruptcy.
Since assets of the business were acquired for use and not for resale, estimated current market
prices or appraisal values are of less importance than if these items were intended for sale.
* Objectivity principle. Accounting measurements should be based upon dollar amounts that
are factual and subject to independent verification. Historical cost of assets is objective;
estimated market values or appraisals change over time and are not factual or objective.
* Stable-dollar assumption. An assumption by accountants that the dollar is a stable unit of
measure. This assumption permits reporting assets at cost, even though individual assets may
have been acquired in different years.
AACSB: Reflective Thinking
AICPA BB: Critical Thinking AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Topic: A Starting Point: Statement of Financial Position
141. Forms of Business Organization
State and describe the three most common forms of business organizations in the United
States.
(1) Sole Proprietorship-One person, unlimited liability, and owner acts as manager.
(2) Partnership-Two or more persons and owners are personally responsible for debts.
(3) Corporation-Stockholders are owners, limited liability, ease of transfer of ownership, and
separate entity under the law.
AACSB: Reflective Thinking
AICPA BB: Legal AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy Learning Objective: 02-08 Explain common forms of business ownership—sole proprietorship; partnership; and corporation—and
demonstrate how they differ in terms of their presentation in the statement of financial position.
Topic: Forms of Business Organization
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-128
Multiple Choice Questions
142. The financial statements of a business entity:
A. Include the balance sheet, income statement, and income tax return.
B. Provide information about the profitability and financial position of the company.
C. Are the first step in the accounting process.
D. Are prepared for a fee by the Financial Accounting Standards Board.
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles. Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
143. A balance sheet is designed to show the financial position of an entity:
A. At a single point in time.
B. Over a period of time such as a year or quarter.
C. At December 31 of the current year.
D. At January 1 of the coming year.
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses. Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-129
144. Accounts payable and notes payable are:
A. Always less than the amount of cash a business owns.
B. Creditors.
C. Written promises to pay a certain amount, plus interest, at a definite future date.
D. Liabilities.
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles. Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-130
145. The balance sheet of Dotty Designs includes the following items:
This list includes:
A. Four assets and three liabilities.
B. Five assets and three liabilities.
C. Five assets and two liabilities.
D. Six assets and two liabilities.
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles. Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of the relationship of revenues and expenses.
Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
146. An accounting entity may best be described as:
A. An individual.
B. A particular economic unit.
C. A publicly owned corporation.
D. Any corporation, regardless of size.
Learning Objective: 02-02 Explain certain accounting principles that are important for an understanding of financial statements and how
professional judgment by accountants may affect the application of those principles.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Learning Objective: 02-05 Explain how the income statement reports an enterprise's financial performance for a period of time in terms of
the relationship of revenues and expenses. Learning Objective: 02-06 Explain how the statement of cash flows presents the change in cash for a period of time in terms of the
company's operating; investing; and financing activities.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-131
Presented below is the balance sheet for Sabino Family Dentistry on January 1 of the current
year.
During the first few days of January, the following transactions occurred:
Jan 1 The business borrowed $99,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $44,550 cash.
3 Equipment was purchased for $62,700 on credit.
5 The business collected $26,400 of its accounts receivable and paid $37,950 of its accounts
payable.
147. On January 6, total assets of the business amount to:
A. $826,650.
B. $994,950
C. $957,000.
D. $950,400.
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity. Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-132
148. On January 6, owners' equity amounts to:
A. $752,400.
B. $44,550.
C. $796,950.
D. $895,950.
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity. Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
149. On January 6, the accounts payable balance is:
A. $136,950.
B. $36,300.
C. $24,750.
D. $99,000.
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets + Liabilities = Owners' Equity.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
150. On January 6, the accounts receivable balance is:
A. $24,750.
B. $38,775.
C. $77,550.
D. $63,525.
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the basic accounting equation.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-133
151. On January 6, the cash balance is:
A. $127,050.
B. $138,600.
C. $165,000.
D. $202,950
Learning Objective: 02-03 Demonstrate how certain business transactions affect the elements of the accounting equation: Assets +
Liabilities = Owners' Equity. Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Essay Questions
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-134
152. Presented below is the balance sheet for Manhattan Family Dentistry on January 1 of the
current year.
During the first few days of January, the following transactions occurred:
Jan 2 Equipment was purchased for $38,000 on credit.
2 The business collected $16,000 of its accounts receivable and paid $23,000 of its accounts
payable.
3 The business borrowed $60,000 from the bank, giving a note payable due in 90 days.
3 Additional capital stock was issued in exchange for $27,000 cash.
Complete the following balance sheet for Manhattan Family Dentistry on January 4 of the
current year.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-135
Computations:
a $20,000 + $16,000 (A/R collected) - $23,000 (paid on A/P) + $60,000 (borrowed) +
$27,000 (invested) = $100,000
b $31,000 - $16,000 collected = $15,000
c $35,000 + $38,000 (equipment purchased) = $73,000
d $456,000 + $27,000 additional investment = $483,000
e A/P $45,000 + $38,000 - $23,000 (paid) = $60,000
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-136
153. Complete the January 31, 20__, balance sheet of Countrywide Legal Services using the
following information.
(1) Stockholders' equity at January 1, 20__, included capital stock of $140,000.
(2) The land and building were purchased by the business for a total price of $200,000 on
January 25, 20__, from a company forced out of business. On January 31, an appraiser valued
the property at $260,000.
(3) Additional capital stock was issued in exchange for $50,000 cash.
(4) Retained earnings at January 31, 20___, amounted to $49,400.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-137
Computations:
a. Total assets must be equal to total liabilities plus owners' equity of $375,000.
b. $200,000 (cost of land and building) less $135,000 for land = $65,000 for building.
(Appraised value of property ignored.)
c. Accounts receivable must be $50,000 to achieve total assets of $375,000.
d. $140,000 (capital stock at January 1) plus $50,000 (additional investment).
e. Total liabilities must be $135,600 to achieve total liabilities plus owners' equity of
$375,000.
f. Notes payable must be $90,000 to achieve total liabilities of $135,600.
Learning Objective: 02-04 Explain how the statement of financial position; often referred to as the balance sheet; is an expansion of the
basic accounting equation.
Multiple Choice Questions
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-138
154. A set of financial statements:
A. Is intended to assist users in evaluating the financial position, profitability, and future
prospects of an entity.
B. Is intended to assist the IRS in determining the amount of income taxes owed by a business
organization.
C. Includes notes disclosing information necessary for the proper interpretation of the
statements.
D. Is intended to assist investors and creditors in making decisions involving the allocation of
economic resources.
155. Which of the following statements is not consistent with generally accepted accounting
principles relating to asset valuation?
A. Many assets are originally recorded in accounting records at their cost to the business
entity.
B. Subtracting total liabilities from total assets indicates what the owner's equity in the
business is worth under current market conditions.
C. Accountants assume that assets such as office supplies, land, and buildings will be used in
business operations, rather than being sold at current market prices.
D. Accountants prefer to base the valuation of assets upon objective, verifiable evidence
rather than upon appraisals or personal opinion.
156. Water world Boat Shop purchased a truck for $12,000, making a down payment of
$5,000 cash, and signing a $7,000 note payable due in 60 days. As a result of this transaction:
A. Total assets increased by $12,000.
B. Total liabilities increased by $7,000.
C. From the viewpoint of a short-term creditor, this transaction makes the business more
solvent.
D. This transaction had no immediate effect upon the owner's equity in the business.
157. A transaction caused a $15,000 decrease in both total assets and total liabilities. This
transaction could have been:
A. Purchase of a delivery truck for $15,000 cash.
B. An asset with a cost of $15,000 was destroyed by fire.
C. Repayment of a $15,000 bank loan.
D. Collection of a $15,000 account receivable.
Full file at https://testbankgo.info/p/
Chapter 02 - Basic Financial Statements
2-139
158. Which of the following is (are) correct about a company's balance sheet?
A. It displays sources and uses of cash for the period.
B. It is an expansion of the basic accounting equation: Assets = Liabilities + Owners' Equity.
C. It is sometimes referred to as a statement of financial position.
D. It is unnecessary if both an income statement and statement of cash flows are available.
159. Which of the following would you expect to find in a correctly-prepared income
statement?
A. Cash balance at the end of the period.
B. Revenues earned during the period.
C. Contributions by the owner during the period.
D. Expenses incurred during the period to earn revenues.
160. What information would you find in a statement of cash flows that you would not be able
to get from the other two primary financial statements?
A. Cash provided by or used in financing activities.
B. Cash balance at the end of the period.
C. Total liabilities due to creditors at the end of the period.
D. Net income.
161. Which of the following statements relating to the role of professional judgment in the
financial reporting process are valid?
A. Different accountants may evaluate similar situations differently.
B. The determination of which items should be disclosed in notes to financial statements
requires professional judgment.
C. Once a complete list of generally accepted accounting principles is prepared, judgment
need no longer enter into the financial reporting process.
D. The possibility always exists that professional judgment later may prove to have been
incorrect.
Full file at https://testbankgo.info/p/